Medical Malpractice Insurance Crisis: Hospital Assistance to Physicians

Transcription

1 Medical Malpractice Insurance Crisis: Hospital Assistance to Physicians Vinson & Elkins LLP Houston, TX I. INTRODUCTION Donna Schmerin Clark, Esq. A. Increase in Premiums The Congressional Budget Office reports that premiums for medical malpractice liability insurance have increased sharply in the last few years 15 percent nationwide for all physicians between 2000 and 2002 and higher for certain specialists 22 percent for ob/gyns and 33 percent for internists and general surgeons. CBO Economic and Budget Issue Brief, Limiting Tort Liability for Medical Malpractice, January 8, The GAO reports wide variances in increases from state to state and among specialties. For example, an increase of 75 percent by the largest insurer is cited for general surgeons practicing in Dade County, Florida, from 1999 to 2002, while general surgeons in Minnesota covered by the largest insurer saw an increase of only 2 percent over the same period. See Gov't Accounting Office, Medical Malpractice Insurance Multiple Factors Have Contributed to Premium Rate Increases, GAO T (Oct. 2003). B. Access to Care C. Crisis States The AHA reports in its 2003 Professional Liability Insurance Survey that 45 percent of surveyed hospitals report that the malpractice insurance crisis has resulted in loss of physicians and/or reduced coverage in emergency departments. The AMA has identified the following twenty states currently experiencing a medical liability crisis: Arkansas, Connecticut, Florida, Georgia, Illinois, Kentucky, Massachusetts, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Washington, Nevada, West Virginia, and Wyoming. Twentyfour states and the District of Columbia are seeing the warning signs of a potential crisis. The AMA identifies stable: California, Colorado, New Mexico, Louisiana, Wisconsin, and Indiana as the only stable states. See Medical Liability Reform NOW! published by the AMA at II. REFERRAL LAWS APPLICABLE TO MALPRACTICE ASSISTANCE PROGRAM A. Illegal Remuneration Law. 1. General

2 The Illegal Remuneration Law is designed to address instances of patient referrals by providers of federally financed health care services for economic benefit. Social Security Act 1128B(b); 42 U.S.C. 1320a-7b(b). The law prohibits the willful and knowing offer, solicitation, payment, or receipt of any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, (a) for referring an individual for a Government Health Program covered service or item or arranging for such a referral; or (b) for purchasing, leasing, ordering, arranging for, or recommending the purchase, lease, or order of any good, facility, service, or item covered under the Government Health Programs. Government Health Program patients include individuals covered by all federal health benefit programs, other than the Federal Employee Health Benefits Program. 2. Remuneration and Referrals a. Remuneration has been broadly defined to encompass virtually anything of value or economic benefit. Exceptions: The following are not considered to be violations of the Illegal Remuneration Law: Disclosed and reflected discounts; Payments to employees; Payments to purchasing agents in certain group purchasing arrangements; Waiver of Part B coinsurance by federally qualified health care centers for patients qualifying for subsidized services; Safe harbors created by regulation; and HIPAA exception for risk-sharing organizations. b. Referrals has been interpreted to include any action taken by physicians, hospitals, other health care providers, and other individuals to influence a patient's decision in the use of health care services. 3. Penalties for Violation Violation of the law constitutes a felony offense, punishable by not more than five years in prison and/or a $25,000 fine. In order for the government to prove a violation, the element of intent (in this case, willfulness or knowledge) must be shown. 42 U.S.C. 1320a-7b(b). Violators are also subject to program exclusion, a civil monetary penalty of $50,000 per act plus three times the remuneration offered. The OIG has discretionary authority to institute an exclusion action based on its own assessment that a violation has occurred, without waiting for a criminal conviction to trigger exclusion. 4. The Element of Intent The Illegal Remuneration Law requires the parties to act knowingly and willfully. The government carries the burden of proof in prosecuting illegal remuneration violations and must demonstrate that a defendant (1) knowingly and willfully made a payment or offer of payment or solicited or received such payment; (2) as an inducement to

3 5. Safe Harbors the payee to refer an individual to another; (3) for the furnishing of an item or service that could be paid for under the Government Health Programs. United States v. Miles, 360 F.3d 472, (5th Cir. 2004). Courts continue to adjudicate two elements of the law that relate to intent: Whether inducement of an impermissible referral must be the primary or only one purpose of the arrangement; and Whether and to what extent specific knowledge of the law is required. The safe harbor regulations identify transactions that are not subject to criminal or civil prosecution; however, the regulations are not intended to identify every possible instance in which a provider's conduct would be safe from prosecution under the Illegal Remuneration Law, nor do they preclude providers from prosecution under state illegal remuneration laws, which may vary significantly from the federal statute. Copies of the safe harbor regulations may be accessed through the OIG website on the Internet at To date, the OIG has issued safe harbors for the following activities. 42 C.F.R (a) (v). Investment interests Space rental Equipment rental Personal services and management contracts Sale of practice Referral services Warranties Discounts Employees Group purchasing organizations Price reductions offered to health plans Waiver of beneficiary co-insurance/deductibles Increased coverage, reduced cost sharing amounts, or reduced premium amounts offered by health plans Investments in underserved areas Practitioner recruitment in underserved areas OB malpractice insurance subsidies for underserved areas Sales of practices to hospitals in underserved areas Investments in ambulatory surgical centers Investments in group practices Referral arrangements for specialty services Cooperative hospital service organizations Price reductions offered to eligible managed care organizations

4 Price reductions offered by contractors with substantial risk to managed care organizations Ambulance replenishing A safe harbor for obstetrical malpractice insurance subsidies protects payment of some or all of the premium costs for practitioners (physicians and certified nurse midwives) who engage in an obstetrical practice in a primary care Health Professional Shortage Area (HPSA). The following seven standards must be met for safe harbor protection: A written agreement between the parties that delineates the payments. The practitioner must certify that 75% of the obstetrical patients reside in a HPSA or Medically Underserved Area or are part of a Medically Underserved Population. There is no referral requirement as condition for receipt of benefits. The practitioner is not restricted from establishing staff privileges elsewhere. The payment does not vary based on volume or value of referrals. The practitioner must treat Medicaid beneficiaries in a nondiscriminatory manner. The policy is a bona fide insurance policy and the premium is calculated based on a bona fide assessment of the liability risk. If practitioners engage in obstetrics as only part of their practice, the cost reimbursed by the hospital must be attributed exclusively to the obstetrical portion of their practice and services provided in the HPSA. 42 C.F.R (o). The safe harbor was published in 1999 and the purpose set forth in the preamble was to facilitate access to care for beneficiaries in HPSAs. 64 Fed. Reg , (Nov. 19, 1999). The proposed rule solicited comments for expansion of the safe harbor. Although expansion to other specialties was proposed by comment, the OIG refused to include other specialties. 6. Advisory Opinions In 1996, the Health Insurance Portability and Accountability Act ( HIPAA ) was enacted and contained a provision requiring the OIG to establish a process for issuing advisory opinions on compliance with the Illegal Remuneration Law. OIG advisory opinions address the application of the Illegal Remuneration Law and other OIG sanction statutes in specific factual situations. These advisory opinions are available to the public, but are binding only on the Secretary of the Department of HHS and the party requesting the opinion. Nevertheless, they provide guidance with respect to the OIG's position on certain issues. OIG advisory opinions are posted to the OIG website on the Internet at In Advisory Opinion 04-19, the OIG examined whether a hospital could subsidize malpractice insurance for two neurosurgeons who were

5 contemplating retirement because of a precipitous rise in malpractice insurance premiums coupled with an offer for free tail insurance by the insurance carrier if the neurosurgeons choose to retire. The hospital claimed that these physicians were essential to its continued ability to furnish neurosurgical services to its patients, and thus it proposed to subsidize: (a) all of the physicians' tail insurance from its previous carrier; (b) 75% of the additional cost of insurance in the first year of the arrangement under a new carrier; and (c) some portion of the tail insurance relating to the new policy under certain circumstances. The arrangement could continue for a second year if both the financial need and shortage of neurosurgeons in the area remained. The OIG declined to impose sanctions under the Illegal Remuneration Law on the basis of the following factors: (1) the arrangement was temporary and driven by exigent circumstances that would have eliminated the local availability of neurosurgical services; (2) the physicians will not receive any windfall under the arrangement; (3) the physicians are to provide consideration for the payments, including the maintenance of their practices in the community, call coverage, service on hospital communities, and provision of indigent care; and (4) the coverage applies to all locales where the physicians practice, which minimizes any built-in incentive for the physicians to refer to the hospital. The opinion can be found at: 7. The OIG Special Fraud Alerts, Bulletins and Other Guidance The OIG has issued numerous Special Fraud Alerts that describe certain business arrangements that have the potential to violate the Illegal Remuneration Law. To date, the OIG has issued Special Fraud Alerts relating to (a) joint ventures; (b) routine waivers of coinsurance and deductibles; (c) hospital incentives to physicians; (d) prescription drug marketing practices; (e) arrangements for the statute of clinical laboratory services; (f) home health agencies; (g) nursing home suppliers; (h) the provision of services in nursing facilities; (i) fraud and abuse in nursing home arrangements with hospices; (j) physician liability for certification of medical equipment and home health services; (k) physician office space rental arrangements; and (1) telemarketing by durable medical equipment suppliers. The OIG also releases periodic bulletins and other guidance that identify those activities the OIG considers to be highly suspect and will likely investigate for potential violations of the Illegal Remuneration Law. Copies of the special fraud alerts, bulletins and other OIG guidance may be accessed through the OIG website at With respect to malpractice insurance subsidies, the OIG responded to a letter requesting confirmation that a malpractice insurance assistance program proposed to be offered by hospitals owned by an unidentified party to medical staff physicians in states experiencing a crisis in the malpractice insurance market would not violate the Illegal Remuneration Law and Stark Law. Although declining to render an opinion about the arrangement that was the subject of the letter (which

6 B. Stark Law 1. Stark I 2. Stark II was not submitted pursuant to the formal advisory opinion process), the OIG noted in a letter released on January 15, 2003, that the existence of a malpractice insurance crisis in a particular market, with the potential to disrupt access to care by federal health program beneficiaries, would be considered in exercising prosecutorial discretion with respect to malpractice assistance programs. The OIG also enumerated certain safeguards that would be viewed as favorable from a referral law liability perspective. These included the following: (1) offering the assistance only on an interim basis during the duration of the crisis; (2) establishing criteria for eligibility that is not related to the volume or value of referrals from the physician to the hospital offering the assistance; (3) limiting the assistance to the premium increases; and (4) limiting the assistance to current or future physicians on the hospitals medical staff but not limiting the sites at which the insurance could be effective. The letter also noted that the physicians would be required to perform services for the hospital, although the services were not specified. The physician self-referral law is commonly referred to as the Stark Law after Rep. Fortney Pete Stark (D-CA), the Congressman who sponsored the original and subsequent legislation. The initial law (enacted in 1989) is referred to as Stark I. The subsequent amendment to the initial law (enacted in 1993) is referred to as Stark II. Included in the Omnibus Budget Reconciliation Act of 1989, Stark I went into effect on January 1, Social Security Act ( S.S.A. ) 1877; 42 U.S.C. 1395nn. The statute generally prohibits a physician from referring Medicare patients to a clinical laboratory in which that physician or a member of that physician's immediate family has a financial relationship. In addition, the clinical laboratory may not file a Medicare claim for services rendered at the laboratory. Included in the Omnibus Budget Reconciliation Act of 1993, Stark II expanded the Stark I referral prohibition to include other designated health services in addition to clinical laboratory services and broadened the self-referral prohibition to include Medicaid services. S.S.A. 1877; 42 U.S.C. 1395nn. Stark II became effective on January 1, The Prohibition Under the Stark Law, a physician (or immediate family member) who has a financial relationship with an entity is prohibited from making a referral to the entity for the furnishing of designated health services for which payment may be made under Medicare or Medicaid. Moreover, the entity may not present or cause to be presented a claim to any individual, third-party payer, or other entity for designated health

7 DESIGNATED HEALTH SERVICES Clinical laboratory services Physical and Occupational therapy services Radiation therapy services Parenteral and enteral nutrients, equipment, and supplies Prosthetics, orthotics, and prosthetic devices and supplies services furnished pursuant to a prohibited referral. a. Designated Health Services. Delineated in the statute as: Radiology services Durable medical equipment Outpatient prescription drugs Home health services Inpatient/outpatient hospitalservices Final Stark II rules furnish bright-line definitions of these services. Clinical laboratory, physical and occupational therapy, radiology, and radiation therapy services are defined through the publication of an all-inclusive list of CPT and HCPCS codes, which are updated annually in the Federal Register. b. Financial Relationship. Defined as one of the following: 4. Exceptions An Ownership or Investment Interest in the Entity. Can be accomplished through equity, debt, or other means, and includes an interest in an entity that holds an ownership or investment interest in any entity providing the designated health service; or A Compensation Arrangement Between the Physician (or Immediate Family Member) and the Entity. Any arrangement involving remuneration between a physician (or immediate family member) and an entity. An Indirect Financial Relationship. Final Stark II rules define the scope of indirect ownership and compensation relationships. Of note is the requirement for knowledge of the relationship by the entity furnishing the designated health services either through actual knowledge or acting in reckless disregard or deliberate ignorance of the existence of the relationship. The rules also furnish an exception for indirect compensation relationships. The following is a list of the exceptions created by the Stark Law itself and by the regulations published pursuant to the statute. a. Ownership and Compensation Arrangement Prohibitions Physicians' Services Exception In-Office Ancillary Services Exception Prepaid Plans Exception Academic Medical Centers Implants in ASC EPO furnished in or by ESRD facility Preventative Screening Tests Eyeglasses and Contacts following Cataract Surgery Intra-family referrals b. Ownership or Investment Prohibitions Ownership in Publicly Traded Securities and Mutual Funds Ownership Interests in Hospitals in Puerto Rico Ownership in Hospitals Ownership in Rural Providers c. Compensation Arrangements Rental of Office Space and Equipment

8 Bona Fide Employment Exception Personal Services Arrangements Exception Remuneration Unrelated to Designated Health Services Physician Recruitment Exception Group Practice Arrangements with a Hospital Physician Payments Exception Isolated Transactions Fair Market Value Compensation Non Monetary Compensation Medical Staff Incidental Benefits Risk Sharing Arrangements Compliance Training Indirect Compensation Arrangements Charitable Donations by Physicians Referral Services Obstetrical Malpractice Insurance Professional Courtesy Retention Payments in Underserved Areas Community-Wide Health Information Systems 5. Penalties for Violation Unlike the Illegal Remuneration Law, proof of intent to violate the Stark Law is not required for the imposition of penalties. Civil sanctions may be imposed for violation of the statute and can include (a) denial of payment, (b) refunds of amounts collected in violation of Stark Law, (c) up to $15,000 in civil monetary penalties for each bill/claim submitted in violation of Stark Law, (d) up to $100,000 in civil monetary penalties for each arrangement or scheme that violates Stark law, (e) a civil money penalty of three times the amount claimed, and (f) program exclusion. There are currently no criminal penalties for violations of the Stark Law. 6. The Stark I Regulations HCFA (the predecessor agency to the Centers for Medicare & Medicaid Services ( CMS )) published its final rules for Stark I in The Stark I regulations provide limited clarification of the farreaching restrictions contained within the Stark Law. 60 Fed. Reg. 41,914 (Aug. 14, 1995), 42 U.S.C The Proposed Stark II Regulations HCFA published proposed Stark II regulations on January 9, Fed. Reg. 1, The Final Stark II Regulations The Final Stark II Rules were published pursuant to a two phase

9 process, with the first phase published in January of 2001 ( 66 Fed. Reg. 856 (Jan. 4, 2001)), effective January 4, 2002, with a few exceptions, and the second phase published in March of 2004 ( 69 Fed. Reg (March 26, 2004)), effective July 26, Stark Law Advisory Opinions An advisory opinion process was established in 1997 for the Stark Law. 42 U.S.C. 1395nn; 63 Fed. Reg. 1,646 (January 9, 1998). Such opinions address whether a physician referral for designated health services is prohibited under the Stark Law and are binding only on the Secretary of HHS and the requesting party. Stark opinions will not cover issues relating to the fair market value of any goods, services or property, or whether an individual is an employee as defined in IRC 3121(d)(2). Stark Law advisory opinions are available to the public and may be accessed through the CMS website on the Internet at III. ALTERNATIVES FOR ASSISTANCE A. Ob/Gyns Practicing in HPSAs Payment may be made pursuant to the safe harbor for obstetrical malpractice insurance. The Stark Law incorporated the safe harbor into a regulatory exception in Phase II of the final Stark II Regulations. 42 C.F.R (r). B. Employment of Physicians Malpractice insurance coverage is typically included as a benefit paid to an employed physician. The Illegal Remuneration Law contains a statutory exception and safe harbor for remuneration paid by an employer to an employee pursuant to a bona fide employment relationship for the furnishing of items or services covered by Medicare or Medicaid. 42 C.F.R (i). The Stark Law also set forth an exception for bona fide employment relationships if (1) the employment is for identifiable services; (2) the compensation is fair market value and not determined in a manner that takes into account the volume or value of referrals; and (3) the remuneration is provided under an agreement that would be commercially reasonable even if no referrals were made. 42 C.F.R (c). C. Payment of Malpractice Premiums This alternative is achieved through the funding of a foundation or other entity by the hospital for payment of a portion of malpractice premium costs incurred by physicians, typically calculated as all or a percentage of the increase. The following criteria should be present with respect to payment of malpractice insurance premiums: 1. The hospital must be able to document the legitimacy of the malpractice insurance crisis in the community served by the hospital and a genuine belief that access to care will be compromised by the crisis. Files should be maintained documenting the existence of the

10 crisis. Evidence could consist of state legislative efforts concerning tort reform, newspaper articles, state medical society surveys, and anecdotal evidence. 2. To address Stark Law issues, payments could be made by a legal entity separate from the hospital that is funded by the hospital. If so, the payment should be characterized as an indirect payment from the hospital to the physician, rather than a direct payment, that can be structured to qualify for the indirect compensation exception. 3. Physicians eligible to receive funding for malpractice insurance expenses should be limited to physicians currently practicing in the community served by the hospital who are on the active medical staff of the hospital or those relocating to the community. The physicians cannot be restricted from practicing elsewhere. 4. Physicians should be required to complete an application to verify eligibility. 5. Funds remitted to physician applicants for payment of malpractice insurance premiums should be distributed pursuant to an established formula that is uniformly applied to all physician applicants. The formula should guarantee that the physician will, at a minimum, be responsible for payment of that portion of the premium amount equal to the prior years payment plus a CPI inflation factor and should exclude increases based on liability history. 6. Physicians receiving funds should sign an agreement specifying the conditions under which the payment is made. D. Hospital-Sponsored Insurance Products 1. Captive Insurer A captive insurer is an alternative risk-sharing mechanism owned by the entity it insures. Three general types exist, consisting of: (1) a single parent captive that is wholly owned by a single institution; (2) group captives owned by a consortium of institutions that share similar risks; and (3) rent-a-captives, which are organized and managed by a conventional insurer. Physicians pay premiums, which should be lower in cost than commercial insurance. 2. Risk-Retention Groups Another alternative to commercial insurance coverage is the risk retention group established under federal statute. See 15 U.S.C A risk retention group is a corporation or other limited liability association established for the purpose of spreading risk among a group of member-owners who are all engaged in the same business or activity. Physicians contribute capital to establish the risk retention group and pay premiums.